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“This is not a time for the infrastructure community to be shy about the role it has to play. There is a lot of appetite to test things out. We should seize the moment and be fearless,” GI Hub’s chief executive officer Marie Lam-Frendo tells Partnerships Bulletin.
At this crucial juncture of the climate crisis, potential global decoupling, and poverty eradication - and all off the back of a pandemic - the role of infrastructure in building a world for tomorrow cannot be overstated.
But it cannot be done the same way as it has in the past: as it stands, infrastructure is responsible for over 75% of the world’s greenhouse gas emissions according to the UN, and there is a $3trn a year investment gap to deliver necessary infrastructure and achieve climate neutrality targets, according to GI Hub stats.
Connecting the pipes of the pipelines
As the dedicated infrastructure entity for the G20, with a mandate to bridge the public and private sectors to create better infrastructure, the GI Hub has been working to help drive action at the highest levels, including at forums such as the G20 this year. A key focus for all parties is increasing private investment in infrastructure.
In some ways, things seem to be going in the right direction. GI Hub figures show the amount of private capital available for infrastructure more than quadrupled from 2010 to 2021. However, their figures also show large amounts of dry powder waiting to be deployed.
A shortage of bankable projects is often blamed for this capital not converting to concrete investment. Yet Lam-Frendo suggests the reality is more nuanced. “Yes, there is some shortage of bankable projects and a lot of dry powder and debt available, but it’s also important to note that even with bankable projects, this dry powder is typically only being directed toward a very narrow set of projects,” she says, pointing to the fact that the vast majority tends to go into OECD nations.
“The result is a lot of money competing for the same infrastructure with the same risk profile, rather than investors being willing to take a bit more risk.”
Back during the pandemic, and in its immediate aftermath, many investors told Partnerships Bulletin that they were willing to look further up the risk curve, and potentially into new jurisdictions to find opportunities and returns, particularly as infrastructure underlined its reputation for resilience during the pandemic.
However, as yet, this move has not materialised, potentially due to some major systemic bottlenecks and knots that could be solvable. And with the exacerbating factor of infrastructure inflation rising 15% faster on average than wider inflation, addressing bottlenecks and hindrances to cash flows are of the utmost importance.
“We cannot continue to look at infrastructure the same way we look at other asset classes. We are still facing many bottlenecks and we need to look at all of them concurrently,” says Lam-Frendo, pointing to issues such as sovereign investment grading in particular, which is critical in getting any kind of a look at, let alone sign-off, from investors pursuing a project.
At the moment, the ratings are hampered by a chicken and egg problem: the quality and availability of infrastructure in a country is part of the equation of its credit rating.
“It’s a vicious circle. We need to get credit rating agencies working on this,” she says, pointing to efforts in this area at the G20. “A lot of investors won’t even consider an investment if it's below the investment grade.”
Some approaches have been tried to boost the investment grade of projects, notably by the European Bank for Reconstruction & Development (EBRD), which established a credit enhancement scheme for the Elazig Hospital PPP in Turkey that enabled Moody’s to assign a Baa2 rating to the project; two notches above the rating of Turkey itself.
But again, is capital willing to go into some of the markets that need the investment most? One of the big restrictions on capital has been the Basel III regulations created in the post-financial crash era to shore up the global markets - some in the industry are calling for a relaxation of these rules to allow those pools of capital to flow into infrastructure, although that would require a change in classification.
“We’ve been pushing for a few years to get a preferred treatment for sustainable infrastructure for insurers and banks, to make sure we are keeping them involved in infrastructure projects,” Lam-Frendo says. “The regulations were put in to secure a global financial safety net, but while we need to do everything we can to support the stability of the global financial system, we need to create a conducive environment to attract private investment. Infrastructure is too important to climate and sustainable development goals to ignore this issue.”
Joining Forces
Should the aforementioned pipes be connected downstream, the way that the flows are deployed is just as important an issue to solve, and the private sector is set to play a critical role in being the strong partner for those projects.
For Lam-Frendo, the experience and abilities of PPPs will be valuable, in more ways than just getting dollars in. They could set the tone for future collaboration.
“PPP is still the model that is most conducive to bringing the innovation and the expertise that we need from the private sector. PPPs are an established vehicle in many countries,” she says, noting that in the past few years, the GI Hub has been working to develop PPP capacities, most notably through the Africa Infrastructure Fellowship Program.
But PPPs will need to have their own house in order, and make sure that the practice matches the theory that is being taught around the world.
Objective evidence is showing that PPPs are a valid, viable model that delivers value for money, but political perspectives continue to challenge the perception, notably led by the public debates in Canada and the UK.
“For me, the key is bringing ‘partnership’ forward again as the main idea of the model. Too often we start the discussion with our lawyers. It shouldn’t be that way. We need upfront discussions that put partnership at the centre of delivering ultimate outcomes and value.”
These conversations are happening around the world, particularly in North America where models such as progressive P3s are redefining the relationships between the public and private sectors, potentially paving a new way forward for authorities to use alongside the traditional versions.
The important thing is that PPPs can be at the forefront of a new wave: the tip of the spear of infrastructure development. The model is one of the few successful examples of delivering the innovation and creativity that will be needed to solve these complex problems of our times, and bring the scalable solutions needed.
Given the established foothold and strong communities of practice around PPPs, Lam-Frendo considers it clear that: “PPPs remain in a good position to lead and innovate.”